Brent/WTI spread narrows

Energy Report

With the exception of gasoline the rest of the oil complex is in positive territory with WTI (NYMEX:CLM14) leading the way higher. The market is reacting mildly to the surprise draw in crude oil stocks reported by the API late yesterday afternoon. Further supporting oil prices are growing tensions once again in Libya as rebels occupying the ports are now saying they refuse to deal with the new… as they call it… illegitimate Prime Minister Maiteeq. Furthermore there is now the possibility that this view can spread to the ports that have been operating for the last several weeks.

On Tuesday the main oil export pipeline in Yemen was blown up by rebels according to a Reuter’s report. About 110,000 bpd of crude oil exports have now been halted. In addition the attackers hot the electricity lines knocking out power in most of the country’s northern cities. Needless to say the geopolitical risk is ratcheting up once again.

The June Brent/WTI spread is narrowing today and currently hovering around the technical range support level of $7/bbl. With Cushing stock levels continuing to decline and approach the pre-surplus average level the negativity that has kept WTI at a discount to Brent (NYMEX:SCM14) is just about all gone as the inventory level in Cushing is just about back to its normal historical level. As the geopolitical tensions on the international side begin to ease somewhat the spread is likely to move closer to its normal historical level of WTI trading at a small premium to Brent.

Yesterday the EIA released their latest Short Term Energy Outlook (STEO) report. Following are the main oil highlights.

· EIA expects the combination of total liquids supply growth from countries outside of the Organization of the Petroleum Exporting Countries (OPEC) and noncrude oil supply growth in OPEC member countries to exceed world liquids demand growth over the next two years. The call on OPEC crude oil and global stocks (world consumption less non-OPEC supply and OPEC noncrude oil supply) is forecast to fall from an average of 30.0 million bbl/d in 2013 to 29.5 million bbl/d in 2015. Expected non-OPEC supply growth also contributes to an increase in global surplus crude oil production capacity held by OPEC countries from an average of 2.1 million bbl/d in 2013 to 3.5 million bbl/d in 2015.

· EIA estimates that global consumption grew by 1.2 million bbl/d in 2013, averaging 90.4 million bbl/d for the year. EIA expects global consumption to grow 1.2 million bbl/d in both 2014 and 2015. Projected global oil-consumption-weighted real GDP, which increased by an estimated 2.3% in 2013, grows by 2.8% and 3.3% in 2014 and 2015, respectively.

· Countries outside of the Organization for Economic Cooperation and Development (OECD) account for nearly all of the expected consumption growth in 2014 and 2015. China is the leading contributor to projected global consumption growth, with consumption increasing by 400,000 bbl/d in 2014 and 430,000 bbl/d in 2015.

· EIA estimates that non-OPEC liquid fuel production grew by 1.3 million bbl/d in 2013, averaging 54.0 million bbl/d for the year. EIA expects non-OPEC liquid fuel production to grow by 1.5 million bbl/d in 2014 and 1.1 million bbl/d in 2015. EIA forecasts production from the United States and Canada to grow by a combined annual average of 1.4 million bbl/d in 2014 and 1.1 million bbl/d in 2015.

· Unplanned supply disruptions among non-OPEC producers averaged 0.6 million bbl/d in April 2014, roughly unchanged from March. South Sudan, Syria, and Yemen accounted for almost 90% of total non-OPEC supply disruptions. EIA does not assume a disruption to oil supply or demand as a result of ongoing events in Ukraine.

· EIA estimates that OPEC crude oil production averaged 30.0 million bbl/d in 2013, a decline of 0.9 million bbl/d from the previous year, primarily reflecting production declines in Iran, increased unplanned outages in Libya, Nigeria, and Iraq, and strong non-OPEC supply growth. EIA expects OPEC crude oil production to fall by 0.4 million bbl/d in 2014 and an additional 0.1 million bbl/d in 2015, as a result of supply disruptions in OPEC and cutbacks in crude oil production to accommodate increased supplies in non-OPEC countries.

· EIA estimates that OECD commercial oil inventories totaled 2.58 billion barrels at the end of 2013, equivalent to roughly 55 days of consumption. Projected OECD oil inventories remain near 2.60 billion barrels at the end of both 2014 and 2015.

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